How Honeywell Makes Money: Aerospace Generates Revenue

Few American companies are as productive—literally, productive—as Honeywell International Inc. (HON). The global company publicly lists the hundreds of goods and services it develops. A representative sample of their products includes air traffic communication systems, brake pads, commercial boilers, flat panel displays, industrial pigments, planarization materials, rubber insulation, silicone sealants, thermocouples, and water mixing valves. 

Honeywell is a true conglomerate in a world of ever-greater specialization. The company’s reach ranges from ubiquitous civilian products (thermostats found in every home) to the most specialized military equipment such as helicopter engines. Competitors to Honeywell include 3M Company (MMM), Johnson Controls International PLC (JCI), and Raytheon Technologies Corporation (RTX).

Honeywell’s Business Segments

If it wasn’t for mankind’s innate need to arm itself against enemies, Honeywell might be only a large-to-medium-sized enterprise. Honeywell is a giant defense contractor, a large vendor to the United States Armed Forces, and holds substantial interests in Poland, Germany, Turkey, and several other countries. 

While Honeywell might have gotten its start in a previous century by making heating control products, today the company’s aerospace operations have grown to the point that they’ve become their own reporting segment. In fact, it’s Honeywell’s largest. Aerospace accounts for a consistent 35% of company revenue.

Honeywell has three other major reporting segments: building technologies, performance materials and technologies, and safety and productivity solutions. The former includes almost everything that makes modern life comfortable and habitable. Our great-grandparents were content with four walls, a roof, and maybe a chimney. The accouterments that are standard issue in modern living—heating, cooling, humidifying, and airflow—are largely the work of Honeywell and its competitors. 

Honeywell’s Financials

The company undertakes gigantic projects that require huge outlays of both labor and capital. Oil refineries in India, wastewater treatment in Los Angeles—there’s a reason why Honeywell employs over 19,000 engineers and scientists, who themselves are just a small part of a global workforce whose population numbers approximately 110,000 employees worldwide.

With some caveats, it’s been mostly good years for Honeywell in the last decade, and by extension for the company’s investors. The company reported net income of $4.87 billion for the year ending Dec. 31, 2020. This was down approximately 22% over 2019 when the company reported net income of $6.23 billion.

Honeywell reported the global recession spurred by the COVID-19 pandemic caused a significant decline in their aerospace segment revenue for 2020. The negative impact on global travel meant a lowered demand for their products from original equipment manufacturers (OEMs) and lower profits for their commercial aftermarket businesses. Demand—along with sales and profits—also declined for the company’s performance materials and building technologies segments. The safety and productivity solutions segment, however, showed strong growth in both sales and profits for the year as demand increased for the company’s respiratory personal protective equipment (PPE) and automated warehouse solutions. In fact, as of Dec. 31, 2020, the company reported a robust orders backlog of $26.4 billion for their safety and productivity solutions products.

In 2020, Honeywell’s management implemented several strategies in response to the global recession and slowdown in demand for their products. The company initiated cost reduction programs, which included the cancellation of merit increases and permanent reductions to the workforce. In addition to holding $15.2 billion in available cash and cash equivalents, the company secured additional liquidity through a combination of delayed draw term loan agreements and public senior notes offerings.

Honeywell’s Recent Developments

Honeywell had a market capitalization of about $160.5 billion as of April 19, 2021. When a company reaches the size of Honeywell and stays at that level for years, acquisitions become an inescapable part of doing business. While the company reported no significant divestitures in 2020, they did acquire several businesses for an aggregate cost of approximately $261 million (net of cash and debt assumed).

In Oct. 2020, Honeywell bought Rocky Research, a thermal, energy, and power management solutions company that will be included in the aerospace segment. In Dec. 2020, Honeywell acquired the Sine Group—a software-as-a-service (SaaS) company that offers supply chain solutions—for its building technologies segment. At the end of 2020, the company agreed to acquire Sparta Systems (a provider of enterprise management software for the life sciences industry) from New Mountain Capital in an all-cash transaction valued at $1.3 billion. The deal will be reported in the performance materials and technologies segment and is expected to close in 2021.

The Bottom Line

Innovation isn’t just a byword, nor is it a sufficient condition for a giant multinational to prosper in the 21st century. In the 1980s, it would have been hard to imagine a New Jersey-based maker of medical scanners and the metallic film that pills come in taking on multimillion-dollar emission control projects in China. However, in order for Honeywell to stay on top in an industry with large barriers to entry, it will need to consistently adapt, innovate, and diversify into areas that hold the most potential for future profits.